ABSTRACT

Cloud Computing, that is providing computer resources as a service, is a technology revolution offering flexible IT usage in a cost efficient and pay-per-use way. As for the evaluation of companies to whether which technology solution to use, it would be necessary to decide whether or not the evaluation of cloud computing would actually differ to the traditional way of IT outsourcing.

Outsourcing IT capabilities are a crucial and inevitable step for enterprises that want to survive in the currently high competitive climate. Until now most of the researches, that has been done so far, only consider the XaaS model only from a traditional IT outsourcing point of view rather than in the cloud computing context. This research will now include the evaluation of cloud solutions giving companies another possibility to outsource their IT resources.

The purpose is now to see how the evaluation of cloud computing possibilities as an outsourcing option actually differs to traditional IT outsourcing. One aspect that needs to be covered with this purpose, is whether it is possible to evaluate the source through a cloud computing solution with the same concepts and theories used to evaluate traditional IT outsourcing. It will also be the purpose to see, which aspects need to be added or removed when considering a cloud computing opportunity compared to the traditional IT outsourcing.

CHAPTER ONE

1.0     Introduction:

This chapter at hand will introduce the background of the research topic and provide information about the knowledge gap which this topic is about to fill by discussing the previous research around this subject. The argumentation will be enhanced by providing the research questions, purpose and delimitations of the topic.

Cloud computing (CC) has received much attention in recent years, especially from the business community and the media. Also, the endorsements by a number of governments around the world, namely in the U.S. (The Federal CC Strategy) and in Australia (The Australian Government Cloud Implementation Initiative) have provided fresh impetus for this emerging technology. The merits of CC are perhaps best epitomized in the U.S. Federal CC Strategy report. Vivek Kundra, the former U.S. Chief Information Officer claimed that CC can save the US Government U$20 billion annually which made up a quarter of its 2011 IT budget (Kundra, 2011).

Gartner Research estimated the CC industry to reach a $150 billion by 2014. Forrester Research’s forecast was more modest but still impressive, a growth from U$40.7 billion in 2011 to $159.3 billion in 2020. In addition to forecasts, IBM carried out a survey with more than 3,000 global CIO’s and found that 60% of organizations were “ready to embrace CC over the next five years as a means of growing their businesses and achieving competitive advantage” (IBM, 2011).

Despite the prospects of CC and the optimistic forecasts, CC has not proven to be immune to failure. For example, Harris Corporation, a U$6 billion US communications company closed down its CC facility outside Washington DC in 2012, after less than a year of operation. The reason for this move was that both its government and commercial customers preferred hosting “mission-critical information” on their own premises rather than on the cloud (Garling, 2012).

To date, most research on CC has focused on the technical aspects of this technology (Youseffet al., 2008) while some recent studies have also discussed the business implications of CC in terms of organizational benefits and risks (e.g. Leimeisteret al., 2010, Benlian and Hess, 2011). Although, a substantial number of studies already exist on CC, it is still unclear how or whether CC differs from the traditional but not necessarily successful concept of Information Technology Outsourcing (ITO) (Barthelemy, 2001, Lacityet al., 2009). Much of the research on CC examined the concept in isolation with little or no reference to the extensive literature on ITO. This might be partly due to the focus on the technical- instead of the service aspect of the technology. On the other hand, recent studies and textbooks on ITO failed to take notice of CC as a concept overall (Desai, 2009, Aubert et al., 2012, Fitoussi and Gurbaxani, 2012). This is surprising given the attention CC received over the last years. Only a few studies differentiate CC from ITO (e.g. Katzan and Dowling, 2010, Leimeister et al., 2010), although very briefly due to their different focus. It is this gap that we address with this study and identify as a research opportunity. Our aim is to integrate two previously disconnected literatures and to provide an evolutionary and holistic perspective of CC as an emerging technology and service. Taking this approach, we identify and focus on the potential benefits, risks, and mitigation strategies to increase the likelihood of ITO success. We conclude the paper with the implications of cloud computing on practice and research from the business and accounting perspectives.

1.1     Background

Information technology has become pervasive in organizations and an inevitable key success factor in business. Organizations can create, communicate and collaborate faster, more efficient and reliable than ever before.

In the late 1960’s, the computer scientist John McCarthy once brought the concept of utility computing into the technology world, predicting that the life cycle of technology will not only stick as tangible products. As a matter of fact, he took the conceptual leap to predict that computer resources will be provided like nowadays water and electricity – as a service (McCarthy, 1961).

Services are not brand new; there have been network services since the invention of the internet in the 1970's (Martin, 2003). People were able to login remotely, transfer files via the ftp protocol in the early years of the internet already. However in the last couple of years internet services offered online took on an even new dimension.

Software is now capable of being offered online including big fast machines in someone else’s data center running an application that is accessed using a familiar web browser, although someone else owns the application. The payment is done by a fixed subscription fee (Motahari-Nezhad, Stephenson, & Singhal, 2009).

As a consequence there is no need any more for worrying about the machines running the application as the supplier is now taking care of that. There is also no devotion of time and resources needed to develop and maintain the applications that is used.

However there are disadvantages that come along with this kind of transition:

·                    One-size-fits-all approach might possibly not work for enterprises with complex requirements

·                    Other companies might not like the idea of processing the data outside their firewall

·                    The subscription model does normally not align the costs of usage 

Hence companies wanted the convenience and simplicity of software as a service, but still the flexibility of traditional computing. With the concept of virtualization, servers could be utilized more efficiently, while applications and IT infrastructure are independent allowing servers to be easily shared by many applications running virtually anywhere. That is as long as the application that is being used is virtualized (Armbrust, Fox & Griffith, 2009).

Virtualizing the application involves packaging the application bits with everything it needs to run, that could include database, middleware and operating system. This self-contained unit of virtualized application can run anywhere (Armbrust et al., 2009). With the premise that it can run anywhere it does not need to run in the datacenter or in the application provider’s datacenter, it can run in the cloud. The cloud is a computing service that charges based only on the amount of computing resources that are used (Motahari-Nezhad et al., 2009). This pay-per-use feature is one of the big marks of today's cloud computing and one of the things that sets it apart from traditional IT services (Armbrust et al., 2009).

Going back to evaluate whether or not cloud capabilities are worth the investment, it is now assumed that the focus is first of all not about cloud computing but about the traditional way of IT outsourcing as such.

It is now very interesting to go back one step in time before cloud computing, find literature about evaluating traditional IT outsourcing solutions. It is important to understand the theories, methodologies and concepts that play a role in the traditional IT outsourcing’s decision making process. After that it can be discovered whether the evaluation of cloud computing solutions will be different or not.

1.2     Existing Research:

IT outsourcing has been explored since the 1990’s in a reasonable amount of empirical, theoretical and “best practices” guides (Goles & Chin, 2005). Several studies focus on the determinants, advantages and disadvantages of IT outsourcing (Dibbern, Goles, Hirschheim & Jayatilaka, 2004). As a buzzword in the 1990’s, IT outsourcing was the main subject of most of the business magazines and periodicals in that decade.

Over time, researches in IT outsourcing address the advantages and disadvantages of this business model linked with methods and frameworks. The most recognized and used frameworks can be categorized according to three different perspectives of outsourcing; the economical, social or strategic managerial perspective (Lee, Huynh, Chiwai & Pi, 2000).

The economical perspective focuses in the transaction cost economics (Williamsson,1979) and agency cost theory as well as the structure whether or not to outsource IT in terms of monitoring costs, transaction costs and asset specificity (Hancox & Hackney,2000). Following the same rational, Vining and Globerman (1999) frame outsourcing in terms of product and activity complexity, contestability, and asset specificity. The economical framework is about the firm’s understanding of tangible and intangible costs of IT services.

According to the strategic management perspective, the choice of outsourcing should be made according to the IT resources and capabilities and how the organization manages them. “Concentration in core capabilities can be a reason for outsourcing” (Hancox & Hackney, 2000).

While the first two perspectives admit the opportunistic behavior of enterprises (Vining Introduction 3&Globerman, 1999), the partnership theorists believe that “the arrangement between two parties can transcend the organizational differences and cause the parties to work together in a common purpose” (Hancox & Hackney, 2000).

Whilst studies are done, that focus on highlighting frameworks isolated from each other, Hancox and Hackney (2000) present 4 frameworks together to understand the outsourcing decisions in different economic sectors. Cheon, Grover and Teng (1995) draw a very broad framework showing 4 different perspectives to evaluate IT outsourcing.

However there are several studies about IT outsourcing in general. The combination of the concepts involved in this research, that are IT outsourcing, cloud computing and software as a service (SaaS), are presented in different combinations and branches of studies within the literature.

The literature presents researches relating to IT outsourcing and software as a service and also some other services such as infrastructure as a service, database as a service and the business model in general that can be called X as a service (XaaS), which means everything as a service. The context of IT outsourcing considers the XaaS business model mainly focusing on the advantages and disadvantages. The conclusion of the studies points out the main benefits of cost savings, better resources utilization, more application scalability and global outsourcing spectrum possibility (Chou &Chou, 2007).

Cloud Computing as an academic keyword is emerging in the last two years, even though disciplines that are the base of cloud computing as grid computing, virtualization, software oriented architecture, web services, utility computing and distributed computing have been a theme of a vast number of researches (Motahari-Nezhad et al.,2009).

Moreover a common topic around cloud computing is a part of advantages and disadvantages of the model that refers to the business value and return on investment. A fact that could be noticed in the searching for previous studies is that most of the conducted until now were conducted by private research institutes such as Gartner and Forrester.

1.3     Problem Discussion and Research Questions

Until now, most of the studies that refer to XaaS as an outsourcing model do not mention the scenario where XaaS can be provided not just by the traditional outsourcing model but also considering cloud computing providers (Herbert & Erickson, 2009). The lack of information about cloud computing as an outsourcing option can be justified as “the model is in its absolutely infancy” (Hoffman, 2009). Although there are few studies in the academic world, the large vendors as Google, HP, IBM, and Amazon are investing in studies in their R&D departments and laboratories in a way to contribute with scientific knowledge that foments their commercial activities in cloud computing (Motahari-Nezhad et al., 2009).

This research underlines a topic that is neither present in the academic publications nor in the private research institutes; the comparison between traditional IT outsourcing and cloud computing in terms of the evaluation process. Around the media, where practitioners expose their doubts, concerns and opinions the question about the differences between outsourcing and cloud computing is frequently asked and answered (CraigIntroduction4Wood, 2009; Omtzigt, 2008). This study approaches a market issue in a structured and deep analysis to indentify and clarify the main aspects that differentiate the traditional IT outsourcing from cloud computing and also if the criteria of outsourcing evaluation is the same or not in both cases.

The process of IT outsourcing to an external service is a crucial step for small and medium enterprises (SMEs) as it can potentially save a lot of money, resources and hassle for maintenance and updates (Armbrust et al., 2009). A company has two possibilities for a transition:

·                    In a traditional way a company can buy a service by another company and have a contract with a tender that provides them the services. The company will have to get the service from a certain location, where one or more machines are allocated to the company. This is financially assured by paying the supplier a monthly or yearly fee to take care of the IT resources so that they are assured to be up and running. For the following research this kind of IT outsourcing will be called traditional IT outsourcing.

·                    On the other hand, a company has the opportunity to outsource to a cloud, where the applications that are being used by the company can run anywhere and be paid only by the amount of resources that are used. For the following research this kind of IT outsourcing will be called cloud computing.

Both alternatives are illustrated in the figure below:

Figure 1-1: Two Opportunities for a company in its IT transition phase

The question that needs to be answered is therefore the following and can be broken down into two sub parts:

How does the evaluation of cloud computing as an outsourcing option differs to the traditional IT outsourcing?

a)       Is it possible to evaluate the source through cloud computing solution with the same concepts and theories used to evaluate traditional IT outsourcing?

b)      Which aspects need to be added or removed when considering a cloud computing opportunity compared to the traditional IT outsourcing?

1.4     Purpose

The purpose of this research paper is to discover which aspects there are to add or to remove when considering the evaluation of cloud computing instead of a traditional IT outsourcing opportunity. Both have their obvious reasons to be an alternative to corporate computing. But it is important to realize if there are differences in the evaluation of both solutions as an outsourcing option.

It will be also interesting to generally find out to the main aspects that are necessary to evaluate the business model alternatives and their importance for the final decision.

1.5     Delimitations:

The focus on the research paper lies at companies that are interested in outsourcing their services. This can involve two types of companies that are the following:

·                    A company that is currently interested in IT outsourcing

·                    A company that is already outsourcing all or parts of its IT resources

This study is designed considering the constraints in the time frame and number of companies that will accept to be accessed and the considerable novelty in the topic.

1.6     Target Group:

The fundamental idea behind the research is to provide companies with a comparison of traditional IT outsourcing and cloud computing opportunities.

Companies that are provider themselves and have their own employees using in-source IT resources will get the opportunity to read about two IT outsourcing models that are traditional IT out sourcing as such and cloud computing solution.

Organizations that are already using traditional IT outsourcing solutions will get an idea of how cloud computing solutions will differ from their existing IT resources and in what way it can benefit even further.

1.7     Definition of Terms:

The following sub chapter encompasses a definition of key concepts as a basis of this thesis. All concepts are explained later in detail with their specific sources, so that in this chapter the references do not occur.

Cloud Computing: Form of cost-efficient and flexible usage of IT services. The services are offered just-in-time over the internet and are paid per usage.

Clusters: Locally distributed units with the same kind of hardware and operating systems being capable of processing a large amount of data collaboratively.

Grids: Globally distributed units with different operating systems and hardware being capable of processing a large amount of data collaboratively.

Hybrid Cloud: A mixture of a private and public cloud.

Infrastructure as a Service: Users being able to use servers, storage, network setting son demand from other providers on a pay-per-use basis.

Platform as a Service: Developers being able to build their own applications offered on development platforms that are maintained and secured by other providers.

Private Cloud: Clouds that are used in a private network providing more security.

Public Cloud: Clouds that can publicly run anywhere in the world.

Scalability: Refers to the performance of handling growing amounts of work.

Software as a Service: Users can utilize software being offered over the internet without worrying about its maintenance, back-ups or security.

Supercomputers: Machines assembled with a lot of processors that are merged into 1machine with high performance capabilities.

Traditional IT Outsourcing: Ordinary way of a company to choose an external tender to take care of their IT resources with physical assured locations.

Utility Computing: The very idea of computing resources being offered as a service.

Virtualization: With virtualization servers are utilized more efficiently enabling one server to be used by several customers.

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